Where is Your Gold Stored?

Where is Your Gold Stored?

In the early 2000’s I began to reassess my approach to investment. If my economic predictions were correct, there would be a housing crash, followed by a stock market crash, a false recovery, then a series of more severe crashes. It would become increasingly difficult to maintain diversified investments, as each form of investment would become riskier due to the economic collapse I anticipated. As I believed that the collapse would be prolonged, this would mean that there would be a timeline as to when each form of investment had passed its “sell by” date in terms of its relative safety.

I was fairly certain that my prediction of events was likely to be accurate, but I was quite unsure as to the timing, other than the downward progression might be about ten years.

The plan for any investor to get in or out of a given investment generally will depend upon his personality (and abilities). I tend to be farsighted and seem to have a talent for seeing the big picture – how it will all play out. However, I don’t have a quick mind and need to slowly absorb each development as they occur - to weave them into my broader understanding (this is a nice way of saying that I’m not talented at thinking on my feet).

For those whose thinking can change on a dime, there’s much opportunity to act as a trader, getting in and out of investments, maximising profit. For those who, like me, digest events more slowly, it’s wiser to make fewer changes and to plan them further out.

As an example, I held paper gold for years and enjoyed the fact that it could easily be sold. However, I believed from the outset that the paper gold market was inherently risky. I expected that its convenience (no need to carry around heavy bars from one storage facility to another) would result in great popularity over physical gold for many people. Also, for traders, it was easier to buy and sell. I also expected that banks, who already worked on a fractional reserve system, were likely to apply that approach to gold sales – to sell more gold than they had stored and hope never to experience a run (a sudden substantial demand for delivery).

If this reasoning was correct, it would result in the banks and other institutions dramatically over-selling. At a minimum, ten times the amount in storage would be predictable, but one hundred times was possible. This reasoning also dictated that, as paper gold was just that - promissory notes for metal that did not exist, it would be essential to get out before the lie by the sellers became generally known.

About a two years ago, I started to advise others that the time had come to be out of paper gold. I expected that it might take a while before it became common knowledge that a scam had been perpetrated; however, I’ve always believed that it’s better to be out very early rather than a day late.

Again, for those who are prepared to gamble, this approach may not be your choice. Its principle objective is to retain wealth during a period of dramatic change and it’s therefore the conservative approach. It turns its back on maximising returns, but promises greater assurance of coming out of this period with your skin still on.

In recent months, we’ve seen a few cracks in the paper gold market and those cracks are now becoming wider and more numerous.

As predicted, the realisation began when investors decided to take delivery on their gold and ran into difficulties. ABN AMRO Bank stated that they would no longer redeem gold accounts in physical gold, as they had previously agreed. They would, instead, pay in cash. Then, problems ensued with investors who had entrusted their gold to Swiss banks. The banks offered a variety of explanations: regulatory authorities would not allow the removal; the gold could only be removed in instalments. The storage fee structure had changed. The gold could be delivered but there would be a waiting period for delivery. Terrorism and fear of money laundering were also cited as justifications for the failure to adhere to their agreements with clients.

Now, the reader may say that we began by discussing the paper gold market, but what we are seeing here is a failure to deliver on physical gold. This brings us to an important point. In my belief, any gold that is held by a bank is, in a sense, paper gold. You may have a receipt that states that you delivered physical gold to them, or they may have sold you allocated gold, but what you hold is paper.

If you paid a premium to acquire physical gold and you’ve been paying storage fees for the institution to place your gold behind concrete and steel, you’ll likely feel that you’ve been more prudent than those who simply purchase a gold certificate. This, of course, provides you with a greater feeling of security. However, your next-door neighbour, who has placed a few Maple Leafs in a soup can and buried them under his barbecue in the yard, may actually have greater security than you do with what you regard as physical gold in a bank vault in Switzerland.

It would be reasonable to suppose that incidents such as those described above, in Europe, would be big news worldwide, as they suggest a breakdown in the most fundamental responsibility of any banking institution – the ability to deliver whatever its clientele have entrusted it with.

But the media tends not to work that way. Generally, instances like these go unnoticed by the general public for a bit, then they become more numerous, then suddenly, generally without any fanfare, there’s a run on the holding institutions. Today, with the help of the internet, a bank run can occur - literally overnight - but the delivery of heavy metal is more ponderous. It doesn’t move with the keystroke of a computer. This is especially true, as some of the clientele may live half way round the world, and cannot appear on the steps of the bank, the same day, to demand delivery.

However, the outcome is likely to be roughly the same as an electronic run. In a short period of time, perhaps even just a few days, the media will provide reports that somehow, there seems to be a problem in banks delivering gold to its rightful owners. Shortly thereafter, the media will reveal that the problem seems to be a bit more serious than originally thought. But it will take a while before it’s revealed that possibly even 99% of the gold that had been held in the institutions is somehow inexplicably gone. (Think John Corzine.) It will take longer still, before it becomes clear to the general public that, in fact, much of the gold never existed at all and that which did exist is now, simply “missing.”

Whoops.

As the Great Unravelling progresses, we shall see an increase in such debacles. There will be media reports and investigations, but somehow, they will not reach any significant conclusions. The governments of the world will say that a terrible thing has happened, but we must keep our heads and remember that the worst thing that could happen would be the closure of the banks, so above all, they must be protected.

At some point, another “terrorist” act will hit the news and that will eclipse the gold disappearance issue. It will remain unresolved.

As the present decline progresses, we shall all be challenged by the narrowing of the field of investment that occurs when economies slide into depression. “Safe” investments will become fewer and even they will be preyed upon by governments, eager to snatch the chips off the table as the game comes to an abrupt end. For many investors, the field of investment may not extend far beyond real estate (preferably in another jurisdiction) and/or precious metals. If the latter, in the end, there will be very few institutions that can be trusted to hold your wealth and they must be chosen very, very carefully.

Jeff Thomas is British and resides in the Caribbean. The son of an economist and historian, he learned early to be distrustful of governments as a general principle. Although he spent his career creating and developing businesses, for eight years, he penned a weekly newspaper column on the theme of limiting government. He began his study of economics around 1990, learning initially from Sir John Templeton, then Harry Schulz and Doug Casey and later others of an Austrian persuasion. He is now a regular feature writer for Casey Research’s International Man andStrategic Wealth Preservation in the Cayman Islands.